School districts use reserves to stay under Act 46 thresholds


MONTPELIER >> Preliminary budget numbers from nearly 80 percent of school districts are in, but the verdict on how well an Act 46 cost containment mechanism worked is still out.

Overall, statewide education spending is up, but it hasn't risen nearly as much as it has in years past.

With 211 school districts reporting, it appears that statewide education spending went down at the same time that school district budgets went up.

How is that possible? Many districts used raining day money to stay under the spending thresholds and avoid penalties that would be imposed by Act 46, according to Brad James, finance manager at the Agency of Education.

"I polled the business managers as to who had districts that used reserves to stay under the thresholds," James told the House Committee on Education. "The majority had."

Act 46 included a cost containment mechanism called the allowable growth rate.

Each school district was assigned a threshold amount they could increase spending before having to pay a penalty. School districts found the allowable growth rate restrictive as they began to budget for unanticipated costs such as previously negotiated health care and salary increases, special education and issues around tuitioning.

In late January, lawmakers responded by giving districts more wiggle room and lessening the penalties. They also eliminated allowable growth rate for fiscal year 2018 which means that prior law and a statewide excess spending threshold will come into play.

The purpose of allowable growth rate was not to control budget costs but to control education spending overall, according to Scott Beck, R-St. Johnsbury, a member of the House Committee on Education. In this respect, he said allowable growth rate worked.

"Did we control education spending? Yes, we took it [statewide spending per equalized pupil] from 2.85 [percent] down to 1.84 [percent] and that was all it was intended to do. If a school district can find a grant or has a donor or has a reserve fund that impacts what they can do in their budgets so be it. We were looking at controlling education spending because of the tax rates. So, I would say that the allowable growth rate and its penalty absolutely had influence on education spending because the growth went down by half."

Proposed total spending for 211 districts comes out to $1.36 billion and spending per equalized student is up 1.84 percent. Education spending is up just 1.5 percent as opposed to nearly 3 percent last year. School district budgets rose to 2.77 percent up from 2.53 percent. The biggest hike is in the use of offsetting revenues which are up nearly 6 percent versus 1 percent last year for the same group of school districts.

This is not proof that the allowable growth rate as a cost containment measure worked, according to Nicole Mace, executive director of the Vermont School Boards Association. The association and the Vermont Superintendents Association advised lawmakers against implementing the allowable growth rate mechanism.

"When you think of the goal being to reduce expenditures and they increased at the same rate as the prior year [school district budgets], it is not clear to me that it was as effective as some folks might have hoped," Mace said, recalling months of testimony arguing that small school districts can't reduce spending without damaging the quality of their schools.

"There are savings to taxpayers there," said Beck. "Taxpayers will pay 2.5 pennies less on the homestead education tax rate because districts decided to avoid the penalty and spent out of their reserve funds," he added.

But Mace pointed to the 6 percent increase in the use of reserve funds as a bad harbinger for next year.

"The budgets didn't go down, but because they used fund balances or reserves or other sources of one time money education spending – which is what the tax rate keys off of – is lower," Mace said adding that those extra dollars won't be there to cover operating expenses for FY18. "That is concerning when you think about the budget picture for next year."

Beck agreed that districts didn't change spending habits very much from last year and said next year will be interesting. Republican lawmakers wish to add another cost containment mechanism for fiscal year 18 and beyond. Under new provisions tacked on to Act 46 at the end of last month, the law will revert to an older cost containment measure, known as excess spending thresholds, for fiscal year 18.

The original excess spending thresholds were a moving target because they were based on the prior year's per pupil spending. The past few years, lawmakers tightened the threshold by anchoring it to FY14 per pupil spending and then dropping the percent from 125 to 123 to 121. This means more towns will fall into the excess spending category next year and they will have to pay a penalty for each additional dollar they spend over the threshold.

"Next year, by my calculation there will be about 50 districts caught up in that," Beck said. If this past year was an indication, districts will go to great lengths to avoid paying a penalty, according to Beck. So, if the stricter spending threshold means they cut costs then that will be good for the education fund, he surmises, and if instead "they plow through it and pay 100 percent penalty then those penalty dollars will help the ed fund a lot too."

Mace says there is a real problem with applying these cost containment mechanisms across 270 odd school districts. "Our hope is that given the level of work being accomplished around the state implementing other provisions in Act 46 that the legislature will focus on supporting the implementation of that work so that these new unified systems can better manage their resources. That is a more effective strategy to address concerns around cost."

While Mace is worried about school districts using up reserve funds this year, she is equally concerned about the General Assembly using $19 million in surplus funds from the Education Fund – together equaling about $30 million in one time money — and applying it in fiscal year 17. "I think that paints a pretty troubling picture for FY18."

VSBA and the VSA are hoping the General Assembly will spread the surplus out over a couple of years to cushion the impact.

What happens next year if there are no more reserves at the district level or from the state Education Fund? "They need to make up the difference somewhere and that is likely to come from the local tax rate. You could have a double hit," said Mace.


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